EADS FINANCIAL STATEMENTS AND CORPORATE GOVERNANCE

Transcription

1 EADS FINANCIAL STATEMENTS AND CORPORATE GOVERNANCE

2 Financial Policy A message from the Chief Operating Offi cer for Finance Dear Shareholders, Customers and Employees, Hans Peter Ring COO for Finance

3 Financial Policy 005 was the best year ever in EADS history. Financial discipline, vigorous business development, a strong management team and a dedicated workforce- these remain the success factors for delivering excellent financial performance for the sixth consecutive year! Airbus leadership continued in 005, the best year ever in terms of deliveries, order intake and profitability. The 9 billion order intake achieved in 005 validates our belief that the aviation market remains in a vigorous up-cycle. Most impressively, our order backlog of over 50 billion is at historic levels offering five years of forward visibility. The civil helicopter, freighter conversion and turboprop businesses performed exceptionally well. Our defence businesses also contributed stronger results and Space continued its recovery by posting further improved results. This is fresh evidence that EADS is becoming a successfully balanced concern in almost every relevant aerospace segment. Another favourable development was the partial recovery of the U.S. Dollar in 005. Cautiousness is still required however. We, therefore, strengthened our hedge book appropriately, in line with business conservatism and sound profitability targets. Existing cost-savings programs such as Airbus Route 06 continued to be actively pursued. And we see further cost-savings potential across our other businesses. During 005, we maintained significant cash reserves of over 5 billion. We have deliberately conserved cash in order to give us the financial flexibility to: fund new internal initiatives; invest in innovation; and take advantage of business development and M&A opportunities as they arise. Moreover, a conservative approach to cash is a key element of our single A rating a real competitive asset in our industry. EADS now has a strong basis for future growth. All the fundamentals are in place. The next phase in our history of ambitious achievement will be characterized by three paths or enablers of growth: internationalisation, innovation, and improvement. Internationalisation means enhancing our position in the growth markets of the world. We are implementing this process through a targeted combination of direct investment, strategic partnerships, and M&A, backed by a global procurement network. The mix will be specifically adapted to the local or regional context, as we look toward Asia and the Americas for new sources of high margin sales. Innovation is already a hallmark of EADS As our A80 illustrates. Yet the task we have set before the company is to bring to market breakthrough products at a more accelerated pace. Behind the scenes, we are focusing intensely on making our industrial and management processes more creative, more cutting edge. We want to ensure that management is looking ahead, targeting the necessary resources on the types of innovation that deliver the best overall value for our military and commercial customers. Improvement in performance must be a constant task of management. We are determined to deliver impressive results for our shareholders in 006 and beyond. Indeed, our aspiration is to achieve performance standards which are benchmark for our industry. Improvement also means being best-in-class when it comes to business intelligibility. In 005, we implemented our integrated state-of-the-art Risk Management and Internal Control system. This system augments an already impressive array of tools which enable high transparency in our reporting. Given the long-term nature of our businesses and required investments we consider that the further development of the Risk Management processes are crucial for actively steering towards a predictable, sustainably excellent and constantly improving organisation. Finally, we are seeing a further maturation in the EADS shareholder structure. On 9th April 006, two of our founding shareholders, DaimlerChrysler and Lagardère SCA, announced their intention to reduce their holdings while still remaining committed to being long-term shareholders of EADS. This increases the free float, both now and over the next three years, enhancing the attractiveness of EADS as a global investment. We are looking forward to an exciting 006, and to delivering the results you have come to expect of EADS. Yours truly, Hans Peter Ring Chief Operating Officer for Finance

4 EADS Registration Document Part 1 (Financial Statements and Corporate Governance) European Aeronautic Defence and Space Company EADS N.V. (the Company or EADS ) is a Dutch company, which is listed in France, Germany and Spain. Given this fact, the applicable regulations with respect to public information and protection of investors, as well as the commitments made by the Company to securities and market authorities, are described in this Registration Document (the Registration Document ). This Registration Document was prepared in accordance with Annexe 1 of the EC Regulation 809 / 004, filed in English with, and approved by, the Autoriteit Financiële Markten (the AFM ) on 6th April 006 in its capacity as competent authority under the Wet toezicht effectenverkeer 1995 (as amended) pursuant to the Directive 00 / 71 / EC. When used as a Registration Document, this document entitled Financial Statements and Corporate Governance - (Registration Document Part 1) must be read in conjunction with the document entitled Business, Legal and Corporate Responsibility - (Registration Document Part ). This Registration Document may be used in support of a financial transaction as a document forming part of a prospectus in accordance with Directive 00 / 71 / EC only if it is supplemented by a securities note and a summary approved by the AFM. EADS Financial Statements and Corporate Governance

5 Financial Statements and Corporate Governance Registration Document - Part 1 Risk Factors 1 Net Assets, Financial Position, Results Corporate Governance Outlook EADS Financial Statements and Corporate Governance 1

6 General Table of Contents / Registration Document Parts 1 and Financial Statements and Corporate Governance Registration Document Part 1 Risk Factors p Financial Market Risks p. 8. Business-Related Risks p. 10. Legal Risks p Industrial and Environmental Risks p. 14 Chapter 1 - Net Assets Financial Position Results p Management s Discussion and Analysis of Financial Condition and Results of Operations p Certain Information p. 16 Exchange Rate Information 17 Ratings Overview p Critical Accounting Considerations, Policies and Estimates p Scope of and Changes in Consolidation Perimeter p Fair Value Adjustments p Impairment of Assets p Research and Development Expenses p Accounting for Hedged Foreign Exchange Transactions in the Financial Statements p Accounting for Foreign Currency Denominated Operations in the Financial Statements p Accounting for Sales Financing Transactions in the Financial Statements p Measurement of Management s Performance p Order Backlog p Use of EBIT* p EBIT* Performance by Division p EADS Results of Operations p. 8 Consolidated Revenues 9 Consolidated Cost of Sales 1 Consolidated Selling and Administrative Expenses Consolidated Research and Development Expenses Consolidated Other Income and Other Expense Consolidated Amortisation of Goodwill Consolidated Share of Profit from Associates and Other Income (Expense) from Investments Consolidated Interest Result Consolidated Other Financial Result Consolidated Income Taxes Consolidated Minority Interests 4 Consolidated Net Income (Profit for the Period Attributable to Equity Holders of the Parent) 4 Earnings per Share (EPS) Statement of Changes in Consolidated Total Equity (including Minority Interests) p. 5 IAS 9 Related Impact on AOCI 5 Currency Translation Adjustment Impact on AOCI Liquidity and Capital Resources p Cash Flow p Consolidated Cash and Cash Equivalents p Consolidated Financial Liabilities p Sales Financing p Hedging Activities p Foreign Exchange Rates p Interest Rates p Financial Statements p Consolidated Financial Statements (IFRS) p. 48 Appendix: Information on principal investments - Consolidation Scope p Company Financial Statements p Statutory Auditors Fees p Information Regarding the Statutory Auditors p. 15 I EADS Financial Statements and Corporate Governance

7 General Table of Contents / Registration Document Parts 1 and Chapter - Corporate Governance p Management and Control p Board of Directors, Chairmen and Chief Executive Officers p. 18 Chapter - Outlook Financial Outlook p Calendar of Financial Communication p Audit Committee p Remuneration and Nomination Committee p Executive Committee p Internal Control and Risk Management Systems p Overview p Risk Management System p Internal Control Framework p Business Processes Covered by Internal Control Framework p Outlook for Evolution of EADS IC and RM Systems p Interests of Directors and Principal Executive Officers p Compensation Granted to Directors and Principal Executive Officers p Options Granted to the Two Chief Executive Officers p Related Party Transactions p Loans and Guarantees Granted to Directors p Employee Profit Sharing and Incentive Plans p Employee Profit Sharing and Incentive Agreements p Employee Share Offering p Options Granted to Employees p. 155 EADS Financial Statements and Corporate Governance

8 General Table of Contents / Registration Document Parts 1 and EADS Business, Legal and Corporate Responsibility Registration Document Part Chapter 1 - Information on EADS Activities p Presentation of the EADS Group p Overview p Highlights 8 Strategy 8 Organisation of EADS Businesses 10 Summary Financial and Operating Data 1 Relationship Between EADS N.V. and the Group Airbus p Military Transport Aircraft p Eurocopter p Defence & Security Systems p Space p Other Businesses p Investments p Insurance p Legal and Arbitration Proceedings p Incorporation by Reference p Recent Developments p. 56 Chapter - Corporate Social Responsibility p Business Ethics p Proper Business Practices p Compliance with Law Regarding all EADS Activities p Corporate Governance Standards p Policy p Organisation p. 68. Sustainable Growth p Product Quality and Customer Satisfaction p Sustaining and Protecting Innovation p Supplier Management: Fostering a Mutually Beneficial Relationship with EADS Suppliers p. 74. Environmental Care p Policy p Organisation p Performance and Best Practices p Human Resources: Employer Employee Relationship p Workforce Information and Organisation of Work p Human Resources Organisation p Human Resources Policies and performances p Health and Safety: Providing a Safe Workplace for EADS Employees and Subcontractors p Caring for EADS Employees and EADS Know How Policy p Diversity: Commitment to Ensure Equal Opportunity for all EADS Employees p Career Development: Efficient Management of Skills and Know-How p Employee Relations: A Proactive Dialogue p Corporate Citizenship p Maintaining an Open Dialogue with EADS Stakeholders p Policy p Organisation p Performance and Best Practices p Encompassing Community Interests in EADS Global Strategy p Policy p Organisation p Performance and Best Practices p. 9 4 I EADS Financial Statements and Corporate Governance

9 General Table of Contents / Registration Document Parts 1 and Chapter - General Description of the Company and its Share Capital p General Description of the Company p Commercial and Corporate Names, Seat and Registered Office p Legal Form p Governing Law Dutch Regulations p Ongoing Disclosure Obligations Disclosure of Specific Information Date of Incorporation and Duration of the Company p Objects of the Company p Commercial and Companies Registry p Inspection of Corporate Documents p Financial Year p Allocation and Distribution of Income p Dividends p Liquidation p General Meetings p Calling of Meetings p Right to Attend Meetings p Majority and Quorum p Conditions of Exercise of Right to Vote p Disclosure of Holdings p Mandatory Tender Offers p General Description of the Share Capital p Modification of Share Capital or Rights Attaching to the Shares p Issued Share Capital p Authorised Share Capital p Securities Granting Access to the Company s Capital p Changes in the Issued Share Capital Since Incorporation of the Company p Shareholdings and Voting Rights p Shareholding Structure p Relationships with Principal Shareholders p Form of Shares p Changes in the Shareholding of the Company Since its Incorporation p Persons Exercising Control over the Company p Simplified Group Structure Chart p Purchase by the Company of its Own Shares p Dutch Law and Information on Share Buy-Back Programmes p French Regulations p German Regulations p Spanish Regulations p Description of the Share Buy-Back Programme to be Authorised by the Annual General Shareholders Meeting to be held on 4th May 006 p Dividends p Dividends and Cash Distributions Paid Since the Incorporation of the Company p Dividend Policy of EADS p Unclaimed Dividends p Taxation p Annual Securities Disclosure Report p. 11 Chapter 4 - Entity Responsible for the Registration Document Entity Responsible for the Registration Document p Statement of the Entity Responsible for the Registration Document p Information Policy p Undertakings of the Company Regarding Information p. 15 EADS Financial Statements and Corporate Governance 5

10 6 I EADS Financial Statements and Corporate Governance

11 Risk Factors 1. Financial Market Risks p. 1. Business-Related Risks p. 14. Legal Risks p Industrial and Environmental Risks p. 18 EADS Financial Statements and Corporate Governance 7

12 Risk Factors 1. Financial Market Risks EADS and its subsidiaries (the Group ) are subject to many risks and uncertainties that may affect its financial performance. The business, financial condition or results of operations of EADS could be materially adversely affected by the risks described below. These risks are not the only ones facing EADS. Additional risks not presently known to EADS or that it currently deems immaterial may also impair its business operations. 1. Financial Market Risks Exposure to Foreign Currencies EADS revenues are mainly denominated in U.S. Dollars, while a substantial portion of its costs is incurred in Euro and Pounds Sterling. Consequently, to the extent EADS were not to use financial instruments to cover its exposure resulting from this foreign currency mismatch, its profits would be affected by changes in the Euro-U.S. Dollar and Pound Sterling- U.S. Dollar exchange rates. EADS has, therefore, implemented an exchange rate strategy in order to manage and minimize such exposure. In order to secure the rates at which U.S. Dollar revenues (arising primarily at Airbus and in the commercial satellite business) are converted into Euro or Pounds Sterling, EADS manages a long-term hedging portfolio. There are complexities inherent in determining whether and when foreign exchange rate exposure of EADS will materialize, in particular given the possibility of unpredictable revenue variations arising from order cancellations and postponements. Furthermore, as a significant portion of EADS foreign currency exposure is hedged through contractual arrangements with third parties, EADS is exposed to the risk of non-performance by its approximately 40 hedging counterparties. No assurances may be given that EADS exchange rate hedging strategy will protect it fully from significant changes in the exchange rate of the U.S. Dollar to the Euro and the Pound Sterling and that such changes will not affect its results of operation and financial condition. EADS consolidated revenues, costs, assets and liabilities denominated in currencies other than the Euro are translated into the Euro for the purposes of compiling its financial statements. As EADS exchange rate hedging strategy aims to cover its cash flows, and, to a large extent, EBIT*, changes in the value of these currencies relative to the Euro will have an effect on the Euro value of EADS reported revenues, costs, assets and liabilities and, to a lesser extent, EBIT*. Currency exchange rate fluctuations in those currencies other than the U.S. Dollar in which EADS incurs its principal manufacturing expenses (mainly the Euro) may have the effect of distorting competition between EADS and competitors whose costs are incurred in other currencies. This is particularly true with respect to fluctuations relative to the U.S. Dollar, as many of EADS products and those of its competitors (e.g., in the defence export market) are priced in U.S. Dollars. EADS ability to compete with competitors may be eroded to the extent that any of EADS principal currencies appreciates in value against the principal currencies of such competitors. See EBIT* Performance by Division Hedging Impact on EBIT* for a discussion of EADS foreign currency hedging policy. See Accounting for Hedged Foreign Exchange Transactions in the Financial Statements for a summary of EADS accounting treatment of foreign currency hedging transactions. Exposure to Sales Financing Risk In support of sales, EADS (primarily through Airbus and ATR with respect to commercial aircraft) may agree to participate in the financing of customers. As a result, EADS has a significant portfolio of leases and other financing arrangements with airlines. The risks arising from EADS sales financing activities may be classified into two categories: (i) credit risk, which concerns the customer s ability to perform its obligations under a financing arrangement and (ii) aircraft value risk, which primarily relates to unexpected decreases in the future value of aircraft. Measures taken by EADS to mitigate these risks include 8 I EADS Financial Statements and Corporate Governance

13 Risk Factors 1. Financial Market Risks optimised financing and legal structures, diversification over a number of aircraft and customers, credit analysis of financing counterparties, provisioning for the credit and asset value exposure, and transfers of exposure to third parties. No assurances may be given that these measures will protect EADS fully from defaults by its customers or significant decreases in the value of the financed aircraft in the resale market. EADS sales financing arrangements expose it to aircraft value risk, because it retains collateral interests in aircraft for the purpose of securing customers performance of their financial obligations to EADS, and because it guarantees part of the market value of certain aircraft during limited periods after their delivery to customers. Under adverse market conditions, the market for used aircraft could become illiquid and the market value of used aircraft could significantly decrease below projected amounts. In the event of a financing customer default at a time when the market value for a used aircraft has unexpectedly decreased, EADS would be exposed to the difference between the outstanding loan amount and the market value of the aircraft. Similarly, if an unexpected decrease in the market value of a given aircraft coincided with the exercise window of an asset value guarantee ( AVG ) with respect to that aircraft, EADS would be exposed to losing as much as the difference between the market value of such aircraft and the AVG amount. No assurances may be given that the provisions taken by EADS will be sufficient to cover these potential shortfalls. Through the Airbus Asset Management Division or as a result of past financing transactions, EADS is the owner of used aircraft, exposing it directly to fluctuations in the market value of these used aircraft. Counterparty Credit Risk EADS is exposed to credit risk to the extent of nonperformance by its financial instrument counterparties. However, the Group has policies in place to avoid concentrations of credit risk and to ensure that credit risk is limited. Cash transactions and derivative counterparties are limited to high credit quality financial institutions. EADS has set up a credit limit system to actively manage and limit its credit risk exposure. This limit system assigns maximum exposure lines to counterparties of financial transactions, based at a minimum on their credit ratings as published by Standard & Poor s, Moody s and Fitch IBCA. The respective limits are regularly monitored and updated. As counterparty credit risk also arises in the context of sales financing transactions, EADS general policy is to provide financing to customers and through structures with an appropriate credit standing. See Sales Financing. Exposure on Equity Investment Portfolio EADS holds several equity investments for industrial reasons. None of the equity investments are held for speculative or trading purposes. Equity investments are either accounted for using the equity method (associated companies), if EADS has the ability to exercise significant influence, or at fair value. If fair value is not readily determinable, the investment is measured at cost. Changes in the value of equity investments mainly depend on their performance. EADS principal investment in associates is Dassault Aviation. The net asset value of this investment was 1.9 billion at 1st December 005. EADS considers its risk to unexpected changes in the value of Dassault Aviation as well as to all other associated companies as remote. For equity investments other than associates, which make up only a fraction of EADS total assets, EADS regards the risk of negative changes in fair value or impairments on these investments as non-significant. Treasury shares held by EADS are not considered to be equity investments. Additionally, treasury shares are not regarded as being exposed to risk, as any change in value of treasury shares is recognised directly in equity only when sold to the market and never affects net income. Treasury shares are held to hedge the dilution risk arising from employee stock ownership plans and the exercise by employees of stock options. EADS Financial Statements and Corporate Governance 9

14 Risk Factors. Business-Related Risks. Business-Related Risks Aircraft Market Cyclicality In 005, the combined revenues generated from Airbus and ATR represented approximately two thirds of EADS consolidated revenues. Historically, the commercial passenger aircraft market has shown cyclical trends due in part to the sensitivity of passenger demand in the air travel market to growth in gross domestic product ( GDP ). The growth in EADS commercial aircraft activities has consequently been correlated to growth in GDP. Other factors, however, play an important role, such as (i) the average age and technical obsolescence of the fleet relative to new aircraft, (ii) the number and characteristics of aircraft taken out of service and parked pending potential return into service, (iii) passenger load factors, (iv) airline pricing policies, (v) airline financial health and (vi) deregulation. EADS and the Airbus Division have implemented a flexible manufacturing organisation that is intended to help them adapt to cyclical market changes in demand. See Part / 1.1. Airbus Market. Nevertheless, EADS expects that the market for passenger aircraft will continue to be cyclical and downturns in broad economic trends, such as those currently being experienced, may have a negative effect on its future results of operation and financial condition. Impact of Terrorism, Epidemics and Catastrophic Events On Aircraft Market As the terrorist attacks in New York and Madrid, and the spread of the Severe Acute Respiratory Syndrome ( SARS ) virus have demonstrated, terrorism and epidemics may negatively affect public perception of air travel safety and comfort and the demand for air travel and commercial aircraft. Furthermore, major airplane crashes may have a negative effect on the public s or regulators perceptions of the safety of a given class of aircraft, form of design, or airline. As a consequence of terrorism, epidemics and other catastrophic events, an airline may be confronted with sudden reduced demand for air travel and be compelled to take costly security and safety measures. In response to such events, and the resulting negative impact on the airline industry or particular airlines, EADS may suffer from a decline in demand for all or certain types of its aircraft and EADS customers may postpone delivery of new aircraft or cancel orders. Dependence on Defence Spending In 005, approximately % of EADS consolidated revenues was derived from defence spending. In any single market, defence spending depends on a complex mix of geopolitical considerations, budgetary constraints and the ability of the armed forces to meet specific threats and perform certain missions. Defence spending may be subject to significant fluctuations from year to year and country to country. Adverse economic and political conditions, as well as downturns in broad economic trends in EADS defence markets, may have a negative effect on EADS future results of operations and financial condition. In the case where several countries undertake to enter together into defence procurement contracts, economic, political and / or budgetary constraints in any one of these countries may have a negative effect on the ability of EADS to enter into or perform such contracts. Emergence of Public-Private Partnerships and Private Finance Initiatives Defence customers, particularly in the U.K., increasingly request proposals and grant contracts under schemes known as public-private partnerships ( PPPs ) or private finance initiatives ( PFIs ). PPPs and PFIs differ substantially from traditional defence equipment sales, as they often incorporate elements such as: the provision of extensive operational services over the life of the equipment; continued ownership and financing of the equipment by a party other than the customer, such as the equipment provider; 10 I EADS Financial Statements and Corporate Governance

15 Risk Factors. Business-Related Risks mandatory compliance with specific customer requirements pertaining to public accounting or government procurement regulations; and provisions allowing for the service provider to seek out additional customers for unused capacity. EADS is party to PPP and PFI contracts, for example through Paradigm with Skynet 5 and related telecommunications services, and involved in additional PFI proposals, such as the Airtanker (FSTA) project. One of the complexities presented by PFIs lies in the allocation of risks and the timing thereof among different parties over the lifetime of the project. There can be no assurances of the extent to which EADS will efficiently and effectively (i) compete for future PFI or PPP programmes, (ii) administer the services contemplated under the contracts, (iii) finance the acquisition of the equipment and the ongoing provision of services related thereto, or (iv) access the markets for the commercialisation of excess capacity. Nor can EADS be certain that it will not encounter unexpected political, budgetary, regulatory or competitive risks over the long duration of PPP and PFI programmes. Competition and Market Access Most of EADS businesses are subject to significant competition, in particular in the commercial aircraft market, where Airbus has been affected by downward price pressure resulting from such competition. EADS believes that some of the underlying causes of such price competition have been mitigated by restructuring in the aerospace and defence industry. However, the recent weakening of demand has led to greater leverage for certain customers to encourage competition in respect of a variety of issues, including price and payment terms. No assurance can be given that competition may not intensify, particularly in the context of a prolonged downturn. In addition, the contracts for many aerospace and defence products are awarded, implicitly or explicitly, on the basis of home country preference. Although EADS constitutes a multinational combination broadening a domestic market constituency, it may remain at a competitive disadvantage in certain countries, especially outside of Europe, relative to local contractors for certain products. The strategic importance and political sensitivity attached to the aerospace and defence industries means that political considerations will persist for many products for the foreseeable future. Availability of Government Financing In prior years, EADS and its principal competitors have benefited from government financing of product research and development. EADS has recently received financing from certain governments in relation to the A80 commercial aircraft program, and certain E.U. countries have already committed to fund the development of the A50 commercial aircraft program. No assurances can be given that financing will continue to be made available for future projects. Since 199, the E.U. and the U.S. have operated under an agreement that sets the terms and conditions of financial support that governments may provide to civil aircraft manufacturers. The unilateral withdrawal from the 199 agreement by the U.S. government in late 004 eventually led to formal claims and counterclaims being made by the U.S. and the E.U. respectively with the World Trade Organisation ( WTO ). The E.U. and the U.S. have also entered into negotiations to seek a resolution to the issues being disputed in the formal WTO process, with the goal of agreeing a new system that provides for a level playing field when funding future aircraft developments. The terms and conditions of any new agreement, or the outcome of the formal WTO proceedings, may limit access by Airbus to risk-sharing-funds for large projects or establish an unfavourable balance of access to government funds by EADS as compared to its U.S. competitors. Technologically Advanced Products and Services EADS develops and manufactures products and programs that are, for the most part, technologically advanced and, sometimes, novel. Most of EADS products must function under demanding operating conditions. Even though EADS believes it employs sophisticated design, manufacturing and testing practices, there can be no assurance that EADS products or programs will be successfully developed or operated or that they will be developed or will perform as intended. EADS Financial Statements and Corporate Governance 11

16 Risk Factors. Business-Related Risks Certain of EADS contracts require it to forfeit part of its expected profit, to receive reduced payments, to provide a replacement launch or other product or service, or to reduce the price of subsequent sales to the same customer if its products fail to be delivered on time or to perform adequately. For example, EADS has commitments under telecommunication satellite manufacturing contracts that were signed during a period when tight delivery schedules were provided in these contracts, but market practice allowed extension of schedules to meet ever more complex technological requirements. No assurances can be given that performance penalties or contract cancellations will not be imposed should EADS fail to meet delivery schedules or other measures of contract performance. EADS, like other organisations, has experienced occasional product failures and other problems. There can be no assurances that such problems will not occur in the future. In addition to any costs resulting from product warranties, contract performance or required remedial action, such failures may result in increased costs or loss of revenues and may also have a significant adverse effect on the competitive reputation of EADS products. See. Legal Risks Product Liability and Warranty Claims. Major Research and Development Programmes The business environment in many of EADS principal operating business segments is characterised by extensive research and development costs requiring significant upfront investment. Business plans underlying such investment contemplate a long payback period before this investment is recouped. There can be no assurances that the commercial, technical and market assumptions underlying such business plans will be met, and consequently, the payback period or returns contemplated therein achieved. BAE Systems defined benefit obligations have to be funded with post retirement pension assets. As of 1st January 005, BAE Systems is applying International Financial Reporting Standards ( IFRS ). International Accounting Standard ( IAS ) 19 Employee Benefits requires an entity to recognise a pension provision whenever its defined benefits plans are not sufficiently covered by corresponding asset and consequently underfunded. Applying IAS 19, BAE Systems calculated for its U.K. and U.S. pensions schemes a total underfunding amounting to,870 million for year end 004. Through its investments Airbus and MBDA, EADS is potentially affected by the shortfall in BAE Systems pension schemes. However, the agreements between EADS and BAE Systems have the effect of capping the contributions that the investment has to make to the pension scheme for a certain period of time (e.g., until July 011 for Airbus and until December 007 for MBDA). Any additional contribution would be paid by BAE Systems. EADS is therefore not exposed to increased contribution payments resulting from the pension underfunding during the period of the contribution caps. Based on information currently available, EADS judges this information not to be sufficient to determine a reliable basis to calculate its share in the pension deficit. Consequently, EADS expenses the contributions made to the pension scheme as if the plans were defined contribution plans. On 1st November 00, EADS established a new pension scheme for Astrium U.K. The defined benefit obligation of the new plan, calculated as of 1st December 005, amounts to 168 million. Plan assets are recorded at 114 million, resulting in a net liability of 54 million, which covers the maximum risk associated with the creation of the new plan. See Notes to the Consolidated Financial Statements (IFRS) - Note 1(b): Provisions for Retirement Plans. U.K. Pension Commitments EADS has several common investments with BAE Systems, of which the most significant in terms of employees are Airbus and MBDA. In respect of each investment, for so long as BAE Systems remains a shareholder, U.K. employees may stay in the BAE Systems pensions schemes, which currently qualify as multi-employer defined benefit plans. 1 I EADS Financial Statements and Corporate Governance

17 Risk Factors. Legal Risks. Legal Risks Dependence On Joint Ventures and Minority Holdings EADS generates a substantial proportion of its revenues through various consortia, joint ventures and equity holdings and believes that its alliances and partnerships are a source of competitive advantage. These arrangements include primarily: the Eurofighter consortium; two principal joint ventures: MBDA and ATR; majority interests: (a) Airbus, and (b) Dornier GmbH; and investment in associates: Dassault Aviation. The formation of partnerships and alliances with other market players is an integral strategy of EADS and the proportion of sales generated from consortia, joint ventures and equity holdings may rise in future years. This strategy may from time to time lead to changes in the organisational structure, or realignment in the control, of EADS existing joint ventures. EADS exercises varying and evolving degrees of control in the consortia, joint ventures and equity holdings in which it participates. While EADS seeks to participate only in ventures in which its interests are aligned with those of its partners, the risk of disagreement or deadlock is inherent in a jointly controlled entity, particularly in those entities that require the unanimous consent of all members with regard to major decisions and specify limited exit rights. The other parties in these entities may also be competitors of EADS, and thus may have interests which differ from those of EADS. In addition, in those holdings in which EADS is a minority partner or shareholder, EADS access to the entity s books and records, and as a consequence, EADS knowledge of the entity s operations and results, is generally limited as compared to entities in which EADS is a majority holder or is involved in the day-to-day management. Product Liability and Warranty Claims EADS designs, develops and produces a number of high profile products of large individual value, particularly civil and military aircraft and space equipment. EADS is subject to the risk of product liability and warranty claims in the event that any of its products fail to perform as designed. While EADS believes that its insurance programs are adequate to protect it from such liabilities and that no material claims have been made against it, no assurances can be given that claims will not arise in the future or that such insurance cover will be adequate. Export Controls and Other Regulations The export market is a significant market for EADS. In addition, many of the products EADS designs and manufactures for military use are considered to be of national strategic interest. Consequently, the export of such products outside of EADS domestic markets may be restricted or subject to licensing and export controls, notably by the U.K., France, Germany and Spain, where EADS carries out its principal military activities as well as by other countries where suppliers come from, notably, the U.S. There can be no assurance (i) that the export controls to which EADS is subject will not become more restrictive, (ii) that new generations of EADS products will not also be subject to similar or more stringent controls or (iii) that geopolitical factors will not make it impossible to obtain export licenses for one or more clients or constrain EADS ability to perform under previously signed contracts. Reduced access to military export markets may have a material adverse effect on EADS business, financial condition and results of operations. EADS is also subject to a variety of other governmental regulations that may adversely affect its business and financial condition, including among others, regulations relating to the protection of the environment, the use of its products, labour practices and dealings with foreign officials. In addition, EADS ability to market new products and enter new markets may be dependent on obtaining government certifications and approvals in a timely manner. EADS Financial Statements and Corporate Governance 1

18 Risk Factors 4. Industrial and Environmental Risks 4. Industrial and Environmental Risks Together with other companies in the principal industries in which it operates, EADS is subject to numerous E.U., national, regional and local environmental laws and regulations concerning emissions into the environment, discharges to surface and subsurface water and the disposal and treatment of waste materials. EADS believes that its current operations are in substantial compliance with all applicable environmental regulations. EADS believes that it is currently capable of satisfying the stricter environmental standards for the future contemplated by current laws or regulations, including increasingly stringent environmental product quality standards that will be implemented over the next few years, without incurring significant capital expenditure. However, there can be no assurance that increased capital expenditure and operating costs resulting from future environmental regulations will not adversely affect the results of EADS operations and its financial condition. For more information, please see Part /. Environmental Care. 14 I EADS Financial Statements and Corporate Governance

19 1 CHAPTER 1 - Net Assets Financial Position Results 1.1 Management s Discussion and Analysis of Financial Condition and Results of Operations p Certain Information p Overview p Critical Accounting Considerations, Policies and Estimates p Measurement of Management s Performance p EADS Results of Operations p Statement of Changes in Consolidated Total Equity (including Minority Interests) p Liquidity and Capital Resources p Hedging Activities p Financial Statements p Consolidated Financial Statements (IFRS) p. 48 Appendix: Information on principal investments - Consolidation Scope p Company Financial Statements p Statutory Auditors Fees p Information Regarding the Statutory Auditors p. 15 EADS Financial Statements and Corporate Governance 15

20 1 Net Assets - Financial Position - Results 1.1 Management s Discussion and Analysis of Financial Condition and Results of Operations 1.1 Management s Discussion and Analysis of Financial Condition and Results of Operations Certain Information In addition to historical information, this document includes forward-looking statements. The forward-looking statements are generally identified by the use of forward-looking words, such as anticipate, expect, estimate, intend, plan, predict, project, will, believe, should, may or other variations of such terms, or by discussion of strategy. These statements relate to EADS future prospects, developments and business strategies and are based on analyses or forecasts of future results and estimates of amounts not yet determinable. These forward-looking statements represent the view of EADS only as of the dates they are made, and EADS disclaims any obligation to update forward-looking statements, except as may be otherwise required by law. The forward-looking statements in this document involve known and unknown risks, uncertainties and other factors that could cause EADS actual future results, performance and achievements to differ materially from those forecasted or suggested herein. These include changes in general economic and business conditions, as well as the factors described in Risk Factors. The following discussion is based upon the audited consolidated financial statements of EADS for 005, 004 and 00, prepared in accordance with International Financial Reporting Standards ( IFRS ) adopted by the International Accounting Standards Board as endorsed by the European Union (together, the Financial Statements ). Since 1st January 005, EADS has retrospectively applied revised International Accounting Standard ( IAS ) Financial Instruments: Disclosure and Presentation, with the effect of accounting for BAE Systems 0% stake in Airbus as a financial liability in the consolidated balance sheet rather than as a minority interest. In addition, the first-time application of IFRS Share-based Payments in 005 (applied retrospectively to 004), resulted in the expensing of stock option plans. See Notes to Consolidated Financial Statement (IFRS) Note : Summary of significant accounting policies, Note 1: Intangible assets, Note 0: Total equity, Note : Liability for puttable instruments, Note 1: Share-based Payment and Note 5: Earnings per share. The following documents shall be deemed to be incorporated in and form part of this Registration Document: Part 1 / 1.1 Management s Discussion and Analysis of Financial Condition and Results of Operations of the Document de Référence filed in French with the Autorité des marchés financiers on 1st April 004 and filed in English with the Chamber of Commerce of Amsterdam; and Part 1 / 1.1 Management s Discussion and Analysis of Financial Condition and Results of Operations of the Document de Référence filed in French with the Autorité des marchés financiers on 19th April 005 and filed in English with the Chamber of Commerce of Amsterdam. Copies of the Document de Référence for the financial years ended 1st December 00 and 1st December 004 are available free of charge upon request in English, French, Spanish and German languages at the registered office of the Company and on Copies of the financial statements referred to above are also available in English on and for inspection at the Chamber of Commerce of Amsterdam. 16 I EADS Financial Statements and Corporate Governance

21 Net Assets - Financial Position - Results 1.1 Management s Discussion and Analysis of Financial Condition and Results of Operations 1 Exchange Rate Information The financial information presented in this document is expressed in Euro, U.S. Dollars or Pounds Sterling. The following table sets out, for the periods indicated, certain information concerning the exchange rate between the Euro and the U.S. Dollar and Pound Sterling, calculated using the official European Central Bank fixing rate: Average Period End Year ended -U.S. $ - -U.S. $ - 1st December st December st December Ratings EADS currently is rated A1 with a stable outlook by Moody s, A with a stable outlook by Standard and Poor s and A with a stable outlook by Fitch IBCA Overview With consolidated revenues of 4. billion for 005, EADS is Europe s premier aerospace and defence company and the second largest aerospace and defence company in the world. In terms of market share, EADS is among the top two manufacturers of commercial aircraft (surpassing Boeing in terms of both deliveries and orders since 00), civil helicopters, commercial space launch vehicles and missiles, and a leading supplier of military aircraft, satellites and defence electronics. In 005, it generated approximately 77% of its total revenues in the civil sector and % in the defence sector. As of 1st December 005, EADS active headcount was 11,10. EADS organises its businesses into the following five operating divisions: Airbus: Development, manufacturing, marketing and sale of commercial jet aircraft of more than 100 seats and the development and manufacturing of aircraft for military use; Military Transport Aircraft: Development, manufacturing, marketing and sale of military transport and special mission aircraft; Eurocopter: Development, manufacturing, marketing and sale of civil and military helicopters, and provision of maintenance services; Defence & Security Systems: Development, manufacturing, marketing and sale of missile systems; military combat aircraft and training aircraft; provision of defence electronics and defence-related telecommunications solutions; and logistics, training, testing, engineering and other related services; and Space: Development, manufacturing, marketing and sale of satellites, orbital infrastructures and launchers; and provision of space-based services. In general, these manufacturing businesses are characterised by long-term product cycles. Another significant characteristic of many of these businesses is the extent of their dependence on governmental budgets. In 005, the former Aeronautics Division, which included the Eurocopter, ATR, EFW (Elbe Flugzeugwerke), Socata and Sogerma Services business units ( BUs ), was dissolved and a new Eurocopter Division was created. In the adapted segment reporting, EADS allocates the four legacy Aeronautics BUs to Other Businesses. Their activities comprise the development, manufacturing, marketing and sale of regional turboprop aircraft, light commercial aircraft and aircraft components, as well as civil and military aircraft conversion and maintenance services. EADS Financial Statements and Corporate Governance 17

22 1 Net Assets - Financial Position - Results 1.1 Management s Discussion and Analysis of Financial Condition and Results of Operations 1.1. Critical Accounting Considerations, Policies and Estimates Scope of and Changes in Consolidation Perimeter Disposals and acquisitions of interests in various businesses can account, in part, for differences in EADS results of operations for one year as compared to another year. Airbus: Airbus is fully consolidated by EADS in light of the effective control EADS has exercised, by agreement with BAE Systems, over the assets, liabilities and operations of Airbus since 1st January 001. Since 1st January 005, EADS is retrospectively applying revised IAS Financial Instruments: Disclosure and Presentation. Revised IAS provides modified guidance as to whether a share in an entity should be classified as equity or as a financial liability. Pursuant to the put option granted to BAE Systems with respect to its 0% stake in Airbus, EADS has an obligation to purchase the 0% stake whenever requested by BAE Systems, during a yearly-recurring time window, for an amount to be negotiated at the time the put option is exercised, payable in cash or an equivalent amount of EADS shares. In light of these characteristics, IAS requires the put option to be accounted for as a liability ( liability for puttable instruments ) in the consolidated balance sheet, stated at fair value in the amount of.5 billion. The fair value of this liability was derived through various sources, using different valuation techniques, based on best estimates then available to Management. Subsequent changes to the valuation of the put option will be recorded as changes to liability for puttable instruments and to goodwill, without any direct impact on the consolidated income statement. BAE Systems annual claim to net income on the 0% share in Airbus is now recorded as a partial repayment of the liability for puttable instruments, and no longer affects minority interest. Corresponding restatements were made to EADS 004 and 00 consolidated net income and earnings per share to account for this change in accounting policy. The impact on EADS 005 consolidated balance sheet of the application of IAS is illustrated below: Actuals 005 before BAE put option BAE put option value: 001 Dividends paid to BAE Reclass minorities 001 to 004 Valuation put option BAE in 004/005 Total impact Actuals 005 incl. BAE put option Assets Goodwill Total equity ( 654) ( 866) 1 90 Equity attributable to equity holders ( 57) (640) 1 76 Minority interest 40 (1 117) (1 109) ( 6) 176 Total Liabilities (788) Liability for puttable instruments * (788) (*) As a result of the accounting principles adopted by EADS in this respect, the variation in the liabilities for puttable instruments from 001 (.7 billion) to 005 (.5 billion) reflects (i) a decrease in the liability of 788 million due to cumulative dividends paid to BAE Systems over the period (001: 501 million; 00: 100 million; 00: 0 million; 004: 64 million; 005: 9 million) and (ii) an increase in the liability of 64 million related to the cumulative reassessment of the liability at the end of each period (leading to an increase in Airbus goodwill of 541 million in 004 and 9 million in 005). MBDA: EADS and BAE Systems each hold a 7.5% stake in MBDA, with Finmeccanica holding the remaining 5%. Pursuant to the shareholder agreements relating to the MBDA group, EADS and BAE Systems together exercise certain controlling rights over MBDA through MBDA Holdings, including the right of MBDA Holdings to appoint MBDA s Chief Executive Officer ( CEO ), Chief Operational Officer ( COO )-Operations and Chief Financial Officer ( CFO ). EADS proportionally consolidates 50% of MBDA within the DS Division, consistent with its ability to jointly control operations, with Finmeccanica s holding reflected as a 1.5% minority interest. 18 I EADS Financial Statements and Corporate Governance